shell. When Enterprises received the $20,000, incurred liability for interest on the loan, set up the two bank accounts, and made the remodeling expenditures, it was no longer dormant, and the need to postpone the election was no longer present. The standard employed in the regulation is clear. We think petitioners' interpretation of the regulation would merely muddy the waters by creating inevitable confusion as to what constitutes operating assets and what are passive, nonoperating assets. However, even if we are to accept petitioners" argument that the cash derived from the loan was not an asset, we would be compelled to hold that the corporation acquired yet another asset prior to February 26, 1965. As mentioned in our Findings, Waller signed a 10-year lease on the premises on December 3, 1964, and petitioner paid $2,600 as rent under the lease. Quite obviously, Waller executed the lease as nominee for the corporation to be created. In any event, on February 17, 1965, Waller assigned the lease to Enterprises, and prior to the crucial date of February 26, 1965, as detailed in our Findings, the corporation spent $7,293.78 to completely remodel the premises for restaurant-nightclub use. Although Jamison, the lessor, did not formally consent to the assignment of the lease until February 27, 1965, the assignment between Waller and Enterprises was completed more than 1 month before the subchapter S election was made. As between Enterprises and Jamison, petitioners acknowledge that under California law the assignment without Jamison's consent did not ipso facto terminate the lease or render it void. Instead, Jamison could either declare a forfeiture of the lease or acknowledge the assignment. Guerin v. Blair, 33 Cal.2d 744, 204 P.2d 884 (1949). He did the latter, and there is no indication that Jamison ever had any reservations about consenting to the assignment.10 We think Enterprises acquired the lease as one of its assets (Continued) example, the acquisition of operating assets which are necessary to the type of business contemplated may constitute the beginning of business. Under this standard, the acquisition of the lease, the creation of the liquor license escrow, and the expenditure of over $7,000 on remodeling would fall within this regulation. This would begin the first month of the corporation's taxable year since these activities would mark when the corporation began "doing business," as that term is used in sec. 1.1372-2 (b) (1), Income Tax Regs. The inference that Waller was only a nominee is supported by the overall agreement between him and petitioner, petitioner's expenditure of $18,600 on the lease, liquor license, and leasehold improvements during December of 1964, as well as the Jan. 8, 1965, liquor license escrow arrangement. Cf. Cal. Bus. & Prof. Code sec. 24074 (West 1964), dealing with arrangements for the transfer of liquor licenses. 10 Even if Jamison had refused to acknowledge the assignment, Enterprises could have still raised equitable defenses to prevent him from taking over the property-for example, petitioner, not Waller, made the $2,600 rental payment; Enterprises expended substantial amounts for the liquor license transfer; and Enterprises and petitioner incurred the remodeling expenses. Schubert v. Lowe, 193 Cal. 291, 223 Pac. 550 (1924). There is no indication in the record that these defenses would not have been sufficient to block such an attempt by Jamison. prior to February 26, 1965-an asset essential to the operation of the business. In addition to laying out the remodeling expenditures, Enterprises had acquired several other miscellaneous assets, including printed matter, licenses for the business other than the liquor license, and deposits on the utilities for the business. It had also incurred and paid expenses such as legal fees, the rent on Waller's automobile, and fees for the transfer and renewal of the liquor license. These items amounted to $2,631.68. All of these transactions-the borrowing of the $20,000 and the resulting liability for interest on the loan, the lease and the payment of rent thereon, the payment of fees, the leasing of Waller's automobile, and other items-involved tax consequences which were required to be taken into account in computing the taxable income or loss of Enterprises for its first taxable year ended November 30, 1965. Petitioners' accountant admitted that they were reflected in the tax return for that period. We think it clear that they are the kind of events which begin the running of the period within which a new corporation must make the subchapter S election. Significantly, also, Enterprises functioned as any other corporation prior to February 26, 1965, in other respects. As noted, the corporation held its first annual meeting of its organizers and adopted bylaws on January 4, 1965. In addition to maintaining bank accounts from which the disbursements of about $10,000 were made, it kept its accounting journals and records separate from those of petitioners. It also made the improvements to the leased premises, arranged financing, and, generally, directed its efforts toward the development of a profit-making capability. Thos. E. Bone, 52 T.C. 913, 919 (1969). We are compelled to conclude that Enterprises acquired assets more than 1 month before the subchapter S election was made. It did not make the election within the time prescribed by section 1372(c) (1) or the implementing regulations. See Joseph W. Feldman, 47 T.C. 329, 333 (1966); William Pestcoe, 40 T.C. 195, 198 (1963); Simons v. United States, 208 F. Supp. 744, 746 (D.Conn. 1962). Accordingly, Enterprises was not an "electing" small business corporation during its taxable year ended November 30, 1965, and petitioners are not entitled to deduct the corporation's net operating loss in that year. Decision will be entered for the respondent. WILLIAM A. SAWELSON AND SHARON SAWELSON, PETITIONERS V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT MELVIN G. SAWELSON AND EILEEN SAWELSON, PETITIONERS V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT Docket Nos. 212-70, 213-70. Filed October 29, 1973. During their fiscal year ended Jan. 31, 1965, petitioners, who are 1. Partial redemption of petitioners' stock by Acme did not mean- 3. Business purpose is irrelevant in determining dividend equiva- Bruce I. Hochman, for the petitioners. Richard W. Janes and Richard H. Gannon, for the respondent. DAWSON, Judge: *In these consolidated cases respondent determined deficiencies in petitioners' Federal income taxes for their taxable year ended January 31, 1965, as follows: Petitioners William A. Sawelson and Sharon Sawelson.. Docket No. Deficiency $2,101. 67 4, 266. 14 Several adjustments have been conceded. The only issue presented for decision is whether the cash distributed to petitioners on partial redemption of their stock was essentially equivalent to a dividend and therefore taxable as ordinary income rather than capital gain as reported. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference. Melvin G. Sawelson and Eileen Sawelson were husband and wife who resided in Los Angeles, Calif., during their taxable year ended January 31, 1965, and at the time the petition was filed herein. Their *Pursuant to a notice of reassignment sent to counsel for the parties, and to which no objections were filed, these cases were reassigned on Oct. 10, 1973, from Judge Austin Hoyt to Judge Howard A. Dawson, Jr., for disposition. joint Federal income tax return for that fiscal year was timely filed with the district director of internal revenue at Los Angeles, Calif. William A. Sawelson and Sharon Sawelson were husband and wife who resided in Los Angeles, Calif., for the fiscal year ended January 31, 1965, and at the time the petition was filed herein. Their joint Federal income tax return for that fiscal year was timely filed with the district director of internal revenue at Los Angeles. Acme Film Laboratories, Inc. (Acme), is a California corporation which at all times material herein had only one class of common stock and no other class of stock outstanding. As of April 21, 1964, the outstanding common stock was held as follows: Other minority shareholders (20, all unrelated to the peti Sam and Anna Sawelson are the parents of Melvin G. and William A. Sawelson. During the taxable year in question the petitioners Melvin G. and William A. Sawelson each had a beneficial interest in the Sam and Anna Sawelson Trust.1 For several years prior to April 7, 1964, Charles J. Ver Halen (Ver Halen), a minority stockholder, had been making various threats about suing Acme, and had been for some years a direct competitor of Acme. He had also on a number of occasions employed Acme employees to Acme's detriment. Robert G. Taylor (Taylor), counsel for Acme, recommended that Acme reacquire the stock of Ver Halen to eliminate him as a source of frustration and to end his potential access to confidential information. In fairness to the minority shareholders, Taylor recommended that an offer be made to the other minority shareholders to redeem their stock on precisely the same terms as were offered to Ver Halen. Taylor was not concerned about fairness with respect to Ver Halen since the latter was represented by his own counsel. The record is not clear as to the petitioners' respective interests in the trust. Since all the briefs are based on the assumption that each son had a 50-percent interest therein and since the Commissioner did not question the division of the trust income on that basis, as reported on petitioners' returns, we have assumed that each brother had a 50-percent interest in the trust. On being advised that the corporation might soon be acquired by another company, Taylor further recommended that the offer of redemption be extended to the Sawelsons as a group in order to avoid the charge, upon subsequent sale, of an unfair aggrandizement of the majority stock by virtue of not having participated in the prior redemption. The objective was to have the Sawelsons participate in the redemption so that they would have the same approximate proportionate ownership in Acme after the redemption as they had before. On April 7, 1964, Acme's board of directors adopted, and its shareholders approved, a resolution authorizing the company's officers to offer to purchase up to 40,000 shares of Acme stock at a price of $1.95 per share. The offer was extended to all shareholders, with a 13,629share limitation on the number of shares to be purchased from those shares owned or controlled by Acme's directors. On April 7, 1964, Acme's directors were Samuel Sawelson, Melvin G. Sawelson, William A. Sawelson, and David L. Christopher. This offer to purchase Acme's shares was extended to Acme's shareholders by letter dated April 21, 1964. Two reasons were given in the offer for the limitations on the total number of shares to be redeemed and the number to be redeemed from the directors-"so that the total repurchase obligation [would] not impair the ability of the corporation to satisfy its obligations as they fall due" and to preserve capital which "could be used to great advantage in the business to enhance its earning power." Shortly after April 24, 1964, Acme redeemed 29,271 shares of its stock pursuant to its offer of redemption at $1.95 per share. The shares of Melvin G. Sawelson and William Sawelson were purchased by Acme on May 1, 1964. Immediately after the redemption, the outstanding stock of Acme was 130,009 shares. Of this number, 8,600 shares were held by the minority shareholders other than Ver Halen, whose stock interest had been fully redeemed. The impact of the redemption on the three groups of shareholders (i.e., the Sawelsons, Ver Halen, and the other minority shareholders) was as follows: |